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Is TiVo Inc. (TIVO) Livin’ On a Patented Prayer?

Are DVRs the next VCRs?

Yet here are several technological shifts around the corner that could derail TiVo Inc. (NASDAQ:TIVO)’s core business. First and foremost is the new conflict between DVRs and VOD (video on demand). DVRs currently have a market penetration of 46%, while VOD services – which include cable and Internet-based streaming services, have reached 44%. A report from research firm Magna Global indicates that DVR penetration could peak at 50% in 2016, while VOD services could continue to grow to 57%.

This means that major content providers offering on-demand content, coupled with the increased adoption of smart TVs streaming Internet-based content, could limit the usefulness of DVRs. Why will users program a DVR and stockpile programs when they can simply browse for and view the desired program with the click of a button?

To make matters worse, Amazon.com, Inc. (NASDAQ:AMZN) is reportedly working on a cheap set-top box that would bring its massive streaming media library into living rooms. To add insult to injury, the box is reportedly being built by veteran engineers and execs from TiVo and Cisco Systems, Inc. (NASDAQ:CSCO).

Second, VOD is the favored format of major media companies, due to the fact that over half of DVR users skip advertisements in recorded shows. In VOD, most of these ads cannot be skipped. Advertisers currently only pay media companies for a viewed ad if DVR viewers watch the show within the first three days of its initial airing. Since many DVR users are now stockpiling shows and watching them a season at a time, this has translated to a lot of lost revenue for major content providers such as Time Warner Cable Inc (NYSE:TWC), Comcast and The Walt Disney Company (NYSE:DIS). Therefore, media companies could favor smart TVs built on Google Inc (NASDAQ:GOOG) technology, as long as the streaming services offer some non-skippable advertisements.

Third, cloud-based computing, combined with the rise of VOD, will become a major problem for TiVo Inc. (NASDAQ:TIVO) in the near future. Thanks to the proliferation of smartphones and tablets over the past five years, consumers are used to accessing their media library everywhere they go. This has been a boon for Netflix, Inc. (NASDAQ:NFLX), Amazon.com, Inc. (NASDAQ:AMZN) and Hulu Plus, the current leaders of paid streaming media. Although TiVo currently has a mobile app, it is primarily used for browsing and scheduling downloads through a home-based system.

The Foolish bottom line

The bottom line is simple. TiVo needs to roll with the punches or get taken out by a new generation of VOD competitors. The companies that now license TiVo’s DVR technology won’t need it forever, and when the hardware and software (Google, Amazon) manufacturers inevitably team up with the content providers (Time Warner, Disney) in a mutually beneficial relationship, then it could spell the end of TiVo Inc. (NASDAQ:TIVO).

TiVo’s answer to these lingering concerns was a promise to double its stock buyback plan to $200 million – a tame plan for a company that has posted annual losses over eight of the past ten years. Therefore, I believe investors should avoid TiVo and pay closer attention to the rise of cable and cloud-based VOD services instead.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Inc. (NASDAQ:AMZN) and Google. The Motley Fool owns shares of Amazon.com and Google Inc (NASDAQ:GOOG).

The article Is TiVo Livin’ On a Patented Prayer? originally appeared on Fool.com.

Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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